Fiscal Measures Raise Growth in Consumption – Moderate Optimism for Christmas Business

The tax reform and the current economic recovery boosted expenditures by private households (adjusted for price increases) in the first half of 1994 by a hefty 2.3 percent. The demand for durable consumer goods picked up very slowly mainly because consumers expect prices to fall at the beginning of 1995 when Austria will join the European Union. Expenditures by Austrian tourists abroad were very lively. This development together with the relatively slow growth in expenditures by foreign tourists in Austria caused retail sales (adjusted for price increases) to expand only half as fast as domestic private consumption. Christmas business is likely to be slightly better than last year. Private consumption tends to stabilize economic activity over the business cycle. During the upswing consumer expenditures rise by less than the increase in income; during the downswing consumer expenditures decrease less than proportionately. After a tax reform it takes about two to three quarters until consumers have adjusted their consumption plans to the new income path. In the first half of 1994, expenditures by private households exceeded last year's level by 2.3 percent in real terms. This relatively brisk increase was based on strong income gains (tax reform, economic recovery); at the same time a slight increase in the savings ratio of private households was recorded. As a rule, gains in consumer expenditures lag several quarters behind tax relief measures; thus the demand for durable consumer goods, the component in consumption most responsive to income changes, was weaker than in the first half of 1993 (–2.7 percent). Another element depressing demand for consumer durables was the expectation of lower prices in 1995. Given the low average age of the stock of cars, car sales plunged by 8.2 percent. The demand for furniture and household articles continued to be brisk, a trend that is consistent with the lively construction activity and the trend toward the new emphasis on house and home. In the category of nondurable consumer goods and services, recreational expenditures is the group most responsive to income and price changes. Lower prices abroad resulting from changes in exchange rates, income gains, as well as pent-up demand triggered a travel boom by Austrian tourists; in the first half of 1994, they spent 9.8 percent more than in the first half of 1993. Retail sales are determined by both the expenditures of Austrians and of foreign visitors in Austria. A rise in expenditures by Austrian consumers abroad implies a loss in purchasing power for retail trade in Austria. The decline in the number of tourists visiting Austria, price reductions in travel arrangements, as well as the weak development in disposable income in Germany limited the expansion of retail sales. Adjusted for price increases, sales were 1.2 percent higher than during the corresponding period of 1993. During the summer the heat wave depressed retail sales, and it is doubtful whether these losses have been compensated during the rest of the year. All hope rests now on a brisk Christmas business. Prospects for the Christmas business this year are determined by two opposing factors: the pick-up in economic activity as well as the income gains due to the tax reforms should boost sales; the expectation of lower prices in 1995 as well as cheap travel arrangements to foreign destinations are likely to depress sales. In this context, Christmas business is defined as business that exceeds the "normal" volume in December. Model simulations project a modest increase of up to 1 percent in real terms.